Anil Ambani-led Reliance Communications' 50 per cent telecom business is at risk

With Reliance Communications shutting down its 2G networks across all circles, over 50 per cent of its business is at a risk of being wiped off in a span of few days. RCom will reportedly continue to operate 3G and 4G networks after switching off its 2G business by November end. At present, the company has about 40 million 2G subscribers out of a total of 80 million subscriber base.

While voice services can be delivered on any technology - 2G, 3G and 4G - the operators, like RCom, primarily use 2G technology for voice to cater to a vast user base of about 500 million who use feature phones that don't support 3G and 4G technologies.

The decision is going to hit RCom revenues in a big way. Although there's a fast adoption of smartphones in India, RCom's subscriber base comprise mostly low-value, feature phone users who would probably be reluctant to shift from 2G to 3G/4G, and would rather prefer changing operator. Already, the company has lost 38 million subscribers in over two years. Market experts say that the step will result in a loss of about 60-70 per cent of 2G subscribers.

For RCom, the key reasons for shutting down 2G business are high cost of operations, high debt, deteriorating topline and bottomline, and the impending expiry of spectrum used to deliver 2G services.

It's believed that RCom spends far more to run its 2G operations than its earnings from the same. In fact, that's the case with other telcos as well. Since last September, when the voice calling became free, there was downward pressure on revenues generated through 2G networks across telcos. In the case of RCom, it was generating revenues of Rs 70 per customer whereas the maintenance cost was some Rs 150, resulting in a loss of about Rs 80 per subscriber.

The difference between RCom and other telcos is that RCom is not in a financial position to keep running 2G business at a loss. Its revenues have plummeted 32 per cent in the June ending quarter over a year ago. It has posted net losses of Rs 1,221 crore in June quarter, down from net profit of Rs 54 crore as compared to the corresponding quarter last year. Its net debt stood at Rs 44,345 crore in March 2017.

With 3G/4G switchover, the telco expects the average revenue per subscriber to shoot up to Rs 300.

After calling off its long-pending merger deal with Aircel early this month, RCom is expected to be severely hit as a large amount of its spectrum in 800 megahertz (MHz) and 1800 MHz is expiring by 2021. The 2G subscribers are on 1800 MHz bands whereas 4G subscribers are on 800 MHz band. As per broking firm CLSA, out of its total spectrum holding of 215.2 MHz, 63.4 MHz spectrum in 1800 MHz band is expiring in 2021. RCom currently has 2G and 4G spectrum in 22 circles, and 3G in 13 circles.

In the absence of 2G network, what will happen to RCom existing customers? RCom will be asking them to upgrade to 3G/4G, sources say. Last month, it had asked subscribers to shift to 4G in Gujarat circle as its 2G spectrum was expiring at the end of the month.

Sources say that the telco may not be required to invest in 3G/4G infrastructure to handle higher number of subscribers who would switch from 2G to 3G/4G. Its deal with Reliance Jio involves sharing of spectrum and active infrastructure wherein the investments on 4G active infrastructure is currently borne by Jio.

Recently, the telco got a go-ahead from department of telecom (DoT) on its pending merger with SSTL (Sistema Shyam TeleServices). The merger will add 30 MHz of additional airwaves (800 MHz) to its current spectrum holding.

RCom has been struggling with finding buyers for its businesses - wireless telecom, DTH, optic fiber. Its testing times are unlikely to end in a jiffy.